Dr. Tom StinsonState Economist

Dr. Tom GillaspyState Demographer

Minnesota and the New Normal

Tom Stinson, State EconomistTom Gillaspy, State DemographerNovember 2010

Real GDP Is Growing Again

2006 2007 2008 2009 2010 2011 2012-8

-6

-4

-2

0

2

4

6

8

% ChangeSAAR

The Great Recession Is Over

• The recovery began in June 2009• We have had 5 quarters of real GDP

growth• The economy is not back to its pre-

recession levels• The risk of back-to-back recessions, as in

the early 1980s, is real

The Outlook Is for Slow Growth through 2011

• Real GDP growth rates of less than 2 percent for the remainder of 2010

• Real GDP growth of just over 2.2 percent in 2011

• Inflation is not a problem, 2011 CPI 1.5%• Interest rates remain low through 2011• Only slow improvement in labor market

The U.S. Economy Lost 8.4 Million Jobs in the Great Recession

2006 2007 2008 2009 2010 2011 2012 2013100

108

116

124

132

140

148

156

0

2

4

6

8

10

12

14

Jobs Unemp

Jobs, Millions Percent

Minnesota Jobs Down 4.3% Since Recession Began, U.S. Average 5.6%

Jan

08

Apr

Jul

Oct

Jan

09

Apr

Jul

Oct

Jan

10

Apr

July

90

92

94

96

98

100

102

MN US

IndexDec 2007 = 100

-8%

-4%

0%

4%

8%

12%

2007-2009 20011990-1991 1980-1982

Quarters After NBER Recession Call

This Recession Was More Severe Than Those of 1990-91 and 2001

Percent Change from Quarter Preceding Recession Call

3Q 2010

Why a Slower than Usual Recovery

• No decline in interest rates• Excess production capacity limits

need for new business equipment• Export demands unlikely to surge in

short term• Lost wealth and retirement concerns

will slow release of pent-up demand

Spending on Food and Food Away from Home Will Increase in 2011

2006 2007 2008 2009 2010 2011 2012 20130

2

4

6

8

Home Away

Percent

Interest Rates Will Increase, But Not Until 2012

F Fds 3 mo 6mo 1yr 2yr 5 yr 10 yr 30 yr 30 mtg0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.002005 2009Today 20112012

Percent

The Dollar Is Expected to Continue to Decline through 2013

2006 2007 2008 2009 2010 2011 2012 20130.00

0.20

0.40

0.60

0.80

1.00

1.20

Major Trading Partners

Other Important Trading Partners

Index 2005 = 1.00

Household Net Worth Fell by Nearly $17 Trillion Dollars

2006 2007 2008 2009 2010 2011 2012 20130

10,000

20,000

30,000

40,000

50,000

60,000

70,000$ Billions

$65.6 T

$48.8 T$53.5 T

The Age Distribution Has Changed

20-40 40-45 45-50 50-65 65+0

10

20

30

40

50 47.0

7.6 7.2

21.6

16.6

37.8

10.0 10.4

24.5

17.3

1980 2007

% of Population Over Age 20

What to Watch During the Next Six Months

• Payroll employment• Consumer spending• Savings rate• Credit markets / interest rates• Capacity utilization

National Mobility Has Fallen To Its Lowest Point Ever Recorded

Census Bureau, 2009 CPS and historical

Convergence In Population Growth Rates

Census ests, Exurban includes Isanti, Chisago, Sherburne, and Wright.

Minnesota Saw a 30 Percent Jump in Workers Turning Age 62 in 2008

0

10,000

20,000

30,000

40,000

50,000

60,000

7/05 to7/06

7/06 to7/07

7/07 to7/08

7/08 to7/09

7/09 to7/10

7/10 to7/11

7/11 to7/12

Year Turning Age 62

Wo

rke

d W

ith

in P

as

t 5

ye

ars

2005 ACS

From 2010 to 2020, Minnesota Will

See Large Increases Age 50s and 60s

20,15036,190

47,3305,050

-30,680-9,980

47,95061,920

-2,680-63,650

-42,31054,240

102,960112,540

91,37041,400

8,44016,500

0-45-9

10-1415-1920-2425-2930-3435-3940-4445-4950-5455-5960-6465-6970-7475-7980-84

85+

Source: Minnesota State Demographic Center, rev 2007Numbers are rounded

More 65+ Than School Age by 2020

0

200,000

400,000

600,000

800,000

1,000,000

1,200,000

1,400,000

1950 1960 1970 1980 1990 2000 2010 2020 2030

18-24

65+

5-17

Census counts & State Demographer projection, revised 2007

Health Care Spending Jumps After 55U.S. Health Care Spending By Age, 2004

$1,855$1,074 $1,445

$2,165$2,747

$3,496

$6,694

$9,017$9,914

$3,571

$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

Source: Agency for HealthCare Research and Quality, Medical Expenditure Panel Survey,data for per capita spending by age group in the Midwest. Excludes spending for long-term care institutions.

Labor Force Growth Is About To Slow Sharply

1.52%

1.12%

0.75%

0.43%

0.10% 0.13%

0.27%

0.0%

0.2%

0.4%

0.6%

0.8%

1.0%

1.2%

1.4%

1.6%

1990-2000

2005-10 2010-15 2015-20 2020-25 2025-30 2030-35

Ave

An

nu

al C

han

ge

Age Of Minnesota Agriculture Workers

2000 Census PUMS and 2008 ACS

20082000

World Labor Force Growth SlowingProjected Change In Working Age Population (15-64)

-1.5%

-1.0%

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

Minnesota UnitedStates

Europe China Japan Rest ofAsia

SouthAmerica

Africa

Continent

An

nu

al

% C

ha

ng

e

2000-10

2010-20

U.S. Census Bureau

Percentage of Minnesota Agriculture Workers Foreign Born

2000 Census PUMS and 2008 ACS

The Old Normal+ The Great Recession

+ Long Run Demographic Changes= The New Normal

The “New Normal” Probably Means

• Higher interest rates• Slower economic growth• Increasing numbers of retirees• Less consumption; more saving• A more diverse population• More uncertainty in our personal & national futures• Creative destruction and disruptive innovation• A shift in balance between private and public sectors• Worries about how to pay for past promises• Inability to reach agreements in public policy

The Great Recession Has Been Blamed for Raising the Level of Social

Angst

But What Is Really Happening

Is That We Have Entered A

“New Normal”

Grieving For The “Old Normal”• Denial – “This is not happening.” “Just wait, things will

return to normal.”

• Anger -- “Who is to blame?” Rage and gridlock rule and anyone who symbolizes life, energy, progress, success, happiness, etc. is treated with resentment and mistrust.

• Bargaining – “I’ll change if this just goes away.” Somehow, we can get back to the old normal if we just return to good, ole fashioned (conservative/liberal) values.

• Depression (emotional, not economic) – “What’s the point in trying?” “We are all doomed anyway.” The certainty/finality of events is finally recognized.

• Acceptance – “It’s going to be okay.” Looking for opportunities begins.

But Why Fear The New Normal?It Plays To Our Strengths!

Future economic growth will depend increasingly on increasing productivity and less on labor force size

Education has been the key to Minnesota’s productivity and prosperity

Future productivity increases will depend on decisions and the investments we make now

Public Sector Productivity Growth Will Be Essential

“Making Things Better” May Offer the Greatest Potential

• Cost cutting efforts have focused on transactional jobs

• Largest future productivity gains are likely to come from investments that lead to better outcomesLower lifetime health care costs, reduced recidivism rates, improved graduation rates

• Adapting service delivery plans to meet the needs of the “New Normal”

Productivity Is Not Just Making Things Cheaper

• Productivity is also

Making things better—Quality

Making better things—Innovation

The pressure for disruptive innovation is increasing

Long term cost saving may require investments

which increase short term expenditures

Focusing Just On Expenditure Cuts May Be

Short Sighted

The New 3 R’s for Economic Success in the 21st Century

Retention

Recruitment

Retraining

The Fiscal Catch-22

If we don’t make the necessary public investments in human capital, research and infrastructure, then we won’t have the productivity gains needed to provide the resources to make those investments in the future and pay for the promises we have made.

“If something can't go on forever, it will stop.”

Herbert Stein, Chair President Nixon’sCouncil of Economic Advisors

“I skate to where the puck will be, not to where it has been.”Wayne GretzkyFamous Canadian Philosopher